SGL Carbon SE

XETRA:SGL

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Haley, your Chorus Call operator. Welcome to the SGL Carbon Investor and Analyst Conference Call. [Operator Instructions] I would now like to turn the conference over to Jurgen Kohler, CEO. Please go ahead, sir.

[Jurgen Kohler, Chairman of Management Board & CEO]

Okay, Haley. Thank you very much for the introduction. Ladies and gentlemen, thank you very much for taking the time today to join SGL Carbon's conference call. And we will discuss the results of the first quarter 2019, and we will also continue to confirm our outlook for the year 2019. As usual, here with me today is SGL CFO, Dr. Michael Majerus. He and I will share the talk and a subsequent Q&A session.For the financial reporting, I'm now already handing over to Michael, who will start with the Q1 performance.

[Michael Majerus, CFO & Member of Management Board]

Yes, thank you. And as always, also a hello from my side. As usual, we start with the individual business units. CFM, the Composites Fibers & Materials first. As already announced end of March, we expected the first quarter to be affected by the unfavorable development in Textile Fibers business, and expected result pretty similar to the fourth quarter result 2018, which actually has been the case. I mean what has happened in this market is that we saw in the fourth quarter last year a sharp decline in acrylonitrile prices. Since this is a very transparent market, customer expects a lowering to their sales prices from our product. However, we still had in our inventory, of course, acrylonitrile with high prices. And it took us the fourth quarter and the first quarter this year to work through that inventory so, therefore, the margin was squeezed both in the fourth quarter and the first quarter this year. Therefore, as expected, a pretty similar result. Revenue in the first quarter 2019 was stable, currency adjusted slightly minus 2%. In essence, Aerospace, Automotive and -- revenue-wise, also Textile Fibers were approximate on prior year level with Wind Energy was higher than last year. But last year was, of course, exceptionally low due to the fact that we stepped out of the joint venture with Kümpers and the weak market conditions in the wind energy market in Germany. But this was, more or less, offsetting the development of Industrial Applications with their overall stable development.In revenue, EBIT, as I said, was mainly affected by Textile Fibers business due to the effects which I just explained. Automotive, Aerospace, and Industrial Application were approximate on prior year level. Wind Energy had also lower contributions despite the fact that we had higher sales due to temporary unfavorable product mix in that division. Now let's move to our other division, GMS. Here we have a very different development. Actually, we had a record quarter with regard to EBIT and a strong improvement in sales. As you can see, revenue was up 17% compared to first quarter 2018 and currency adjusted still up by 14%. And the good thing, this is not only due to market segment. This is fully driven by a strong demand in most of our market segments. And especially to mention is the high growth in Semiconductor and LED, both more than 50%. And also, the Automotive & Transport sector with a strong growth of 40% was a main growth driver in that quarter. We, however, also saw a strong demand increase in Industrial Applications and still a slight sales growth in Chemicals. Battery & other Energy was on prior year level as expected. The reason is, as we already indicated, that we are at capacity limits. That was the reason why in December we announced to expand our capacity there, but this, of course, was not going to take place overnight, so therefore, as I said, having a stable capacity, of course, was revenue, yes, on a stable level. On the Solar, we have continued to limit our business. This is less market-driven, less demand-driven but has to do that also in the so-called isostatic graphite we are at capacity limit, and therefore, we are currently focusing here on the LED and Semiconductor, which are also supplied by the isostatic division because, here, margins are higher, and therefore, we have prioritized those markets.The EBIT in Q1, as I said, reached record level of almost EUR 26 million, an increase substantially more than proportionately to sales by 54% due to the improvements in most of the market segments. The only exception here was Chemical and Solar, which remained on prior year level. And the Automotive was, despite the fact that revenue was higher, was temporarily affected by ramp-up costs for a new project in that sector. But overall, as I said, strong increase in profit by 54%. Now let's move to Corporate. Corporate, [ also worthy ] also high sales increase; of course, in absolute terms, minor factor. Interesting is the reason here in that revenue increase because it's coming here from the market segment Energy. What does it mean? We have now Central Innovation, which is also part here in the Corporate segment, not only research and development project but meanwhile some really market projects to where we deliver products already to customer which is not yet handed over to a business unit. And very important, very promising business moving forward is, yet the fuel cell business. We are providing gas diffusion layers for fuel cell for cars, and we have here a customer in Asia with a strong growth in its battery and its fuel cell-driven cars. And this is reflecting here higher revenue, and that is the reason here for that 16% increase. In sales, EBIT, on an overall look declined by EUR 2 million from minus EUR 5.6 million in the first quarter 2018 to minus EUR 7.6 million. This is however only due to a onetime effect we had in the previous quarter 2018, which was almost a EUR 4 million gain from a land sale of our former graphite electrode division in Canada. Excluding this effect, EBIT would have improved. And the main reason here is on one hand, as I said, lower cost in the corporate segment, which was last year affected by the introduction of our new Operating Management System, OMS, and the other reason as I said, the higher earnings contribution from our fuel cell business in our Central Innovation. Now what does it mean now putting all this information together with the group figures? So revenue in total increased by roughly 10% to almost EUR 289 million. As I said, the main driver here is, of course, the GMS strong revenue growth. EBIT declined by 9%, but was -- this was only due to the already-mentioned onetime effect of EUR 4 million from the land sale. If we take this out and look on the ongoing operational run rate, our EBIT has improved by roughly EUR 2 million. And the reason is that the lower EBIT in the CFM division was overcompensated by the improvement at GMS, and that's the main driver. Net financing result was also better than previous quarter. This was primarily affected by a positive currency effect on intercompany loans we have in the United States, so U.S. dollar loan financing. This is due to the BMW financing for our ACF carbon fiber manufacturing site in the United States and due to currency effect. That was a positive effect. And this compensated the -- overcompensated the higher interest expenses from the new convertible bonds, which we issued in September 2018 as well as from the first-time adoption of IFRS 16, which is the new leasing standard, which has also slightly increased our interest expense.Lower net result, although this was already mentioned in our guidance which we gave end of March. Here, of course, we have seen the effect that last year, we had a onetime effect in the amount of EUR 28 million. This is accounting effect coming from the acquisition of our former BMW joint venture where we had to adjust the value in onetime gain, which is different -- which has a difference between the transaction value and the former book value concerning our historical 51% share. This was a non-cash [ return ], onetime gain of EUR 28 million, which, of course, did not re-occur again. And that is the reason why the net result declined, but it's still positive in the amount of EUR 8.9 million.Now looking at cash flow on the next page. Cash flow from operating activities improved from minus EUR 15.3 million now to EUR 4.1 million. Reason here is a lower increase in working capital. At the same time also, our investing activities, outflow was reduced mainly due to the fact that in last quarter, we had to spend for the acquisition of the Wackersdorf site, which is more than EUR 20 million, and that was overcompensating the higher CapEx which we had in the first quarter 2019 compared to 2018. Therefore, in essence, positive free cash flow improved close to breakeven due to the 2 effects, by the operating cash flow and lower cash outflow from investing activities. Free cash flow from discontinued operations was negative. The reason here was the final settlement with the buyer of our HITCO Aerostructures business in the reporting period. But as I said, this is now settled and done. And in the last year's period, we had on the other hand a very high positive impact in the amount of roughly EUR 60 million, which was the final outstanding payment for the sale of the former Performance Products division. So therefore, a lot of changes in the discontinued activities, but as I said, on continued activation, a clear improvement with regard to cash flow. Now let's have a look at balance sheet ratios. Equity ratio stayed relatively stable at 33%; percentage-wise, a slight decrease by 50 basis points. The reason is on the one hand, a negative effect due to lower interest rate and the effect on pension liabilities which was a little bit lowering our equity. On the other side, we had increase in total assets by roughly EUR 36 million due to leasing. This new leasing standard means that, in essence, all the leasing, whether it was historically operational lease or financial lease, are now shown in our books. In the past, as you know, only the financial leases were shown on our books, not the operating leases. Now both types on our book. That's not a big effect, but as I said, EUR 36 million. That is the main reason for this slight percentage-wise reduction in equity ratio, but it's clearly above our target ratio of 30%. Net financial debt, slightly higher mainly due to the already-mentioned final settlement with the buyer of HITCO Aerostructures. Gearing still slightly below our target of 0.5. And also, the leverage ratio is still below our 2.5 figure at 2.1.Now so far, a quick overview on the first quarter. And now, I hand over back to Jurgen with regard to the outlook for the whole year.

[Jurgen Kohler, Chairman of Management Board & CEO]

Okay, Michael. Thank you very much. I mean I'm going to conclude this presentation with one more slide only. In a nutshell, our guidance is unchanged compared to what was presented only 6 weeks ago at the March 27 Analyst Conference. As a consequence, I will do this repeat quickly. Regarding the reporting segment CFM on Page 11. Our guidance is unchanged for sales, mid-single digit increase we will see, mainly driven by volume growth.And EBIT again, guidance is unchanged. We had a weak start, which was explained by Michael, mainly driven by the textile segment. The full year recurring EBIT we expect still on the prior year level. The higher cost of the raw material inventory for the textile, as Michael explained, in the first quarter is consumed, so this lower raw material effect should help us to benefit in the next quarters. And also in the second half, we expect higher project invoicing and an improved product mix.Turning to the reporting segment GMS and Corporate. For GMS, again, sales and EBIT guidances are unchanged. Sales will be stable on prior level. The prior year was boosted, as you know, by a very important positive IFRS 15 effect. In terms of EBIT, we say stable on prior year level. Again, the IFRS 15 positive impact you know already. Despite the very strong first quarter now in 2019, we anticipate somewhat lower volumes in the next quarters and some higher costs. But however, the target EBIT margin of 12% should again be exceeded which proves that we have a very robust business model even in the expected overall softer economic environment.In Corporate, EBIT guidance is unchanged. We are going to be close to prior year level, which as explained had a positive onetime effect of approximately EUR 4 million from a land sale.Now let's look at the outlook for the entire group. All factors are, in terms of guidance, unchanged. In terms of sales, we will see a mid-single digit percentage increase compared to 2018. Again, here we have this positive IFRS 15 effect driven by GMS. EBIT will be stable on the prior year level by the same reason. For net profit, we expect breakeven now in 2019 after the EUR 41 million positive in 2018. This is, as Michael explained driven by the non-recurrence for the positive EUR 28 million effect from the full consolidation of our previous BMW joint venture. And of course, because of the corporate bond that we issued in this April, we will see higher interest expenses in 2019. CapEx, we have guided approximately, give or take, EUR 100 million. Net debt should increase by a mid-double-digit million euro figure. This is driven by the higher interest expenses and CapEx. But please note, our net debt-to-EBITDA target of below 2.5, we will adhere to. For cash flow, our guidance is also unchanged. We will see a substantial improvement of the negative low-double digit million euro figure. This concludes already my part. I thank you very much for your attention. And now, I'm handing back to Haley to lead us through the Q&A session.

[Operator]

[Operator Instructions] The first question is from the line of Marc Gabriel of Bankhaus Lampe.

[Marc Gabriel, Analyst]

Congratulations for the prolonging of your contract. Another three years, still.

[Jurgen Kohler, Chairman of Management Board & CEO]

Thank you, Marc.

[Marc Gabriel, Analyst]

First of all, I have a question regarding the net profit guidance. I mean breakeven for the full year after EUR 9 million for the first quarter, and if I take the run rate of the EBIT, we should come at a result on net profit level we should be higher than breakeven. Your thoughts on that? That would be great. Then it looks to me like your CapEx might be -- not get to the forecast of EUR 100 million after you spend only EUR 50 million in Q1. Maybe an update here what's going on there. Will we see some postponements? And the last question is on the -- probably on the order volume for the NIO corporation. I guess what you're delivering there is for the ES6. Could you give us a quantity of volumes you are planning to ship over for this Chinese electric vehicle?

[Michael Majerus, CFO & Member of Management Board]

Okay, Marc, this is Michael. I will start with the first question, and Jurgenwill then answer the last one. I mean with regard to net profit, I think the main driver in Q1 is, of course, the GMS business, as you know. And here, we have to be cautious because we already mentioned you cannot multiply Q1 result with 4. It was -- Q1 was an exceptionally quarter with historic high-profit figure there. We are a little bit more reluctant with the second half of the year. We had also -- we have also not a linear delivery spread in GMS this year. We have a more front-loaded approach this year. So therefore, volume will be somewhat lower in the second half. Therefore, also fixed cost as the option will be lower. That's also the reason why, as Jurgenalready mentioned, we expect higher cost in the second half. And I think very frankly speaking, since Jurgenand me have started in 2014, we always had one guidance: not to promise more than deliver, rather the opposite. So we are conservative people. But also, from the best of our knowledge, we think it's too early even after a good first quarter to promise more. As I said, we still have to see how the second half develops. And as I said, from our expectation today at GMS, we expect somewhat lower volumes and higher costs in the second half. Now with regard to CapEx, I mean you're right, but that is so to say the usual SGL problem. We have here in Germany a nice advertisement on the part of an insurance company, which was called [Foreign Language] so everything has to happen until the end of the year. So usually, we have not a very linear pattern on our CapEx processes. So we usually start low and focusing most of the majorities in the second half. So we, Jurgenand me, we had a total review on that. So our today expectation is that the EUR 100 million is still valid, and we are currently see also much more application coming from the business unit. So we still expect the EUR 100 million to be a sort of guidance. And with your third question, I hand back to Jürgen.

[Jurgen Kohler, Chairman of Management Board & CEO]

Marc, again, thank you for congratulations, and great to have you on the line again. And NIO is an exciting case for us. And we are talking about battery cases. Battery cases for battery electric vehicles, of course. The product -- project volume, we are not allowed to disclose. We are already happy to be allowed to disclose that it's NIO. So it's prototypes at this stage. NIO has 2 cars. Model 8, it is on the road. Again, and you are right, model 6 is the next one to come, and that is the car that we are addressing. Why are we so excited? This is not only one project for us. We have various battery casing projects. And here really, the material properties of carbon reinforced plastics have outstanding benefits. Weight is 50% of a steel casing. The material is much stiffer than steel. We provide acoustic shielding, electromagnetic shielding and other things, thermal management. So we believe that battery cases are an exciting adventure for us going forward.

[Marc Gabriel, Analyst]

Is there any interest from other customers as well -- from other automotive producers as well for this type of product?

[Jurgen Kohler, Chairman of Management Board & CEO]

Absolutely, yes. We have won a small serial project -- [ seried ] project for next year from a European OEM. And we have other projects as we speak in our hands and under development.

[Operator]

The next question is from the line of Christian Obst.

[Christian Obst, Analyst]

First, I would like to have a more overall economic question. You mentioned some kind of softer economic environment which you hear all over the -- from very different companies. Where do you see it in your business currently, a slight slowdown in demand? So you have a widespread industry knowledge, and you are widespread into the industries. Maybe you can give us some indications there. And then coming to the cash flow and to the net debt. A situation you said that your net debt was approximately EUR 260 million at the end of the first quarter and you're not including other financial liabilities into that calculation as I see it, right? Please, can you give us an idea of why not? And what are mainly the other financial liabilities here? And with what kind of demand -- cash demand for inventories can we calculate going forward? So what is your working capital projection? So there was an ongoing slight increase, I would say, when it comes to working capital against overall sales. What can we expect when we calculate what is an ongoing growth of the business? Should this number also increase going forward and what kind of operating cash flow -- it was approximately EUR 4 million in the first quarter -- do you expect for the entire year?

[Jurgen Kohler, Chairman of Management Board & CEO]

Okay. Christian, let me start with the overall economic situation that we observe in SGL, and then I will hand over to Michael for the more financially driven questions that you had. And again, thank you for being on the line today. Weakening of the industries, I'm sure you are reading the same analyses that we are reading on a daily basis. Especially in Europe, and more specifically in Germany, the wind industry has been weak. It was in the newspaper again yesterday. But the order intake of the wind turbine manufacturers was really bad, okay? That did not impact us very much because, as Michael said, we are coming from a low base after the divestment of SGL Kümpers. The textile industry regarding polyacrylonitrile textiles in the fourth quarter, early this year was weak because we had the high raw material cost, which reduced the demand for our material. And then Solar is weaker a little bit than in the previous years. That is a cyclical phenomenon because less equipment is bought. Although, albeit solar cell production is continuing in Asia, in China on a very high-level, this does not impact us because, as we explained earlier, we have redirected our material a little bit away from the lower margins in Solar, LED, Semiconductor and other areas. Having said this, LED and semi is strong, I mean at least for us providing graphite for the manufacturing of LED and semi. We know that certain areas of LED and semi are a little bit weaker, but overall the industries are growing. And we have still a good order book in Chemicals. That is probably the area that we are following closest because chemical industry should be impacted earlier in the cycle. Automotive, we cannot confirm what you are reading. Graphite for the automotive industry for us is very strong. We are sold out. Applications like cooling water pumps, brake system pumps, vacuum systems, all these applications need graphite, and we are continuing to invest based on orders that we have won. So it's a mixed picture, but overall, the situation confirms our business performance in the first quarter.

[Michael Majerus, CFO & Member of Management Board]

Okay, and then -- this is Mike Majerus. So here, starting your question with the cash flow first. I mean if you look into the 2018 figure, we had a negative free cash flow of almost EUR 60 million. We are now guiding a low double digit, so obviously, we will have improvements of whatsoever, EUR 20 million, EUR 30 million, somewhat like this, yes? And where does it come from at the same EBIT? If you look into the individual components, what comes after the EBIT is -- or the EBITDA, I mean we have higher CapEx guidance. So we have said we will have roughly EUR 100 million instead of the, I think it was, EUR 80 million something in the last year. So we have higher CapEx in the amount of EUR 15 million, EUR 20 million roughly. We'll have somewhat higher financial results. This is also implicitly in our guidance now because if I take from the [ 4 ] huge spread in the previous year, this early, roughly from the onetime effect of ACF, there's is still a EUR 10 million missing, which is roughly higher financial result expectation. So we have, as I said, EUR 15 million to EUR 20 million more CapEx. We have EUR 10 million more financial result with a similar EBITDA level. And then improving the cash flow by, what I said, EUR 20 million, EUR 30 million something, in that magnitude, yes, came from the EUR 60 million to low double digit. What does it logically mean? I mean the only thing left is the working capital. And so, therefore, yes, the reason is that we expect an improvement in the working capital to [ Asia ]. And the main reason -- and of course, this has not yet taken place in the first quarter because, as you know, usually, we have -- had done that way after increase in the first quarter and to reduction of working capital in the second half. But main the reason in the year-over-year comparison is we had high inventories, especially last year for 2 reasons. One was we had exceptionally high raw material cost. One thing I already mentioned, we had very high acrylonitrile prices, and the CFM division, they have come down severely to almost half, and if you're looking into it, or maybe came down by a substantial double-digit percentage. And also, the coke price in the GMS division, very high also. These prices have improved. So that's one reason, simply price reduction in inventory. The other reason was we have increased the inventory on purpose due to people [ bet ] under Brexit. We do not expect a structural problem from the Brexit itself. We do not see any big duties wait for us, but we might not exclude if we end up in the heartbreak that there might be temporarily problems at the border because the U.K., to our knowledge, is prepared by no means, have neither 5,000 or 10,000 people they need for the duty in order to have IT system being capable to handle this. So therefore, we have to tackle in this case that we might get temporarily some hiccups at the border line. And since we're running here an integrated value chain, we cannot afford to let our customers dry out with the supply of our product, therefore, we have built the inventory. So we expect that is another reason besides decline in raw material prices is that we expect the Brexit problem to be sorted out this year and that we can -- also can drive this back to a normal level. That are the reasons why this is our expectation with regards to working capital. And with regard to the net financial debt. I think we have included all the financial related -- the financial liability was, of course, not included. I'll -- under liabilities, the only important thing here to mention is, of course, and here, Andreas know what this situation will lead to, this still -- we still have a purchase price payment obligation towards BMW in the amount of roughly USD 60 million or somewhat about EUR 50 million. Since we -- this is not an interest-bearing liability, it is not shown under our financial liability. This is shown in other liabilities, but as I said, all which is really interest-bearing financial liability is, of course, included in that net debt figure.

[Christian Obst, Analyst]

Okay. One, just one remark, I would normally say that the EUR 60 million for the BMW part there is also some kind of a financial liability because you have to pay it afterwards. Or not?

[Jurgen Kohler, Chairman of Management Board & CEO]

Yes.

[Michael Majerus, CFO & Member of Management Board]

We are making this [ expense ]. But anyway, from our accounting expert classified this as an other liability, but we have never hided this. And of course, everyone can make his own definition. But you're right, as soon as we pay it, it definitely will be on our next slide in the net financing.

[Operator]

[Operator Instructions] We have a follow-up question from the line of Marc Gabriel from Bankhaus Lampe.

[Marc Gabriel, Analyst]

Yes, sorry, another 2, if I may. There were also a claim with the former HITCO company. Are there any after effects from other sales which are pending? I'm thinking about Kümpers probably because that business should be not running as the Kümpers family thought. Could there be some aftereffects from those sales? And maybe a question on Panasonic, which you are supplying with material for the lithium-ion battery. We saw that Panasonic is shifting volumes to supply the Japanese car producers instead of expanding its volumes to the Tesla Gigafactory. Any thoughts on this from your side? What are you seeing there?

[Jurgen Kohler, Chairman of Management Board & CEO]

Okay, Marc. Thank you for the follow-up questions. Let me start with Panasonic, and then Michael will talk about the other situation that you raised. I personally am in contact with Panasonic top management, with Hitachi top management and so forth. The press release that they made was not 100% clear regarding the Gigafactory in Nevada. They have completed the full investment. The Gigafactory in Nevada produces 35 gigawatts hours per year of battery capacity. So that has been installed as planned. What now has been postponed or delayed or canceled, I don't know, is the further expansion to above 50 gigawatts hours. And we can just speculate what the reason is. Maybe Tesla's ramp-up Model 3 is slow or whatever, okay? The second information that is in the market is that Tesla is looking for another supplier for the planned Tesla factory in Shanghai. By the way, this is a neighbor to us in Shanghai then. So it is unclear at this stage whether Panasonic will supply Tesla's factory in Shanghai or not. But of course, Panasonic's strategy is like any other battery maker's strategy. They want to expand their portfolio, want to win additional customers. Panasonic, knowingly is very close to Toyota, so they are working with them, and I'm sure they are looking at others. And Marc, as we have already stated, we are looking at other large customers besides Hitachi and Panasonic. So this is a normal development, and we will need to sit and wait a little bit to see what the further development of Panasonic is.

[Michael Majerus, CFO & Member of Management Board]

Yes. And with regard to your other questions, with regard to HITCO claim and the question, how's the situation with other sold business. I mean the HITCO stuff, this was related to quality, topics related to parts which were shipped due to our ownerships, no long-lasting stuff. Of course, we could lengthy argue, but you have to end -- then look -- always look of the alternative to end the lengthy legal dispute and the [ end of this ]. So we have settled the whole stuff now. And -- but now it's really done. And to my knowledge, we are also, meanwhile, out of the warranty period with regard to other topics here at HITCO. So this should have been really the final thing with HITCO, coming back to that business. And with regard to the other business, there is nothing material. I mean Kümpers was nothing. We had last year with regard to graphite electrode and with regard to the Performance Products business some tax payments because we are still liable with regard to tax payments for the periods where we were owners. And of course, since tax reviews are still ongoing, they are usually not up to date but always lagging some years behind, yes? It might be that a small payment might be -- also come to this year, but this is minor topic, yes, nothing material and more ordinary course of business topic. So nothing substantial and nothing big to be expected in that area.

[Operator]

And there are no further questions at this time. I hand back to Jurgenfor closing comments.

[Jurgen Kohler, Chairman of Management Board & CEO]

Okay. Thank you, Haley. To all on the line, thank you very much for your time and attention. The next call, we will organize for early August. We will then present and discuss, of course, the first half performance for 2019 and give you an outlook, an updated outlook, for this year, okay? Thank you very much. All the best, and have a good time. Bye-bye.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.